Chris Lombardi puts defense and security under the spotlight, as he shares his takes on recent NATO and EU cooperation and provides insight into the company’s own long-term strategic partnerships in Europe.

Three trends are currently driving the global electricity sector: decarbonization, decentralization and differentiation. Utilities are making significant contributions to mitigate carbon emissions, while a technology revolution is …

That is the gloomy conclusion of a report on the industry’s problems drawn up forthe European Commission’s competition watchdogs.

The report by Antwerp-based consultants Analyse Auto on current and future excess capacity offers no easy solutions to Europe’s car giants and niche market minnows.

It follows hard on the heels of the controversial decision by Renault to close its Belgian plant at Vilvoorde. In the subsequent storm, Madrid withdrew its application to give subsidies for the expansion of one of Renault’s Spanish plants after Competition Commissioner Karel van Miert denounced companies shopping around for subsidies.

Van Miert is currently pushing the Swedish government to phase out state subsidies to Volvo’s factory at Umea, in northern Sweden. Part of the subsidy package includes compensation for the plant’s out-of-the-way location which conflicts with the EU auto aid framework. Van Miert has warned that the Commission will start proceedings against Stockholm if an amicable agreement cannot be reached.

The Commission is also investigating how to clamp down on subsidy shopping and draw up a new code for aid to the auto industry so that governments do not worsen the looming capacity crisis by encouraging more production with generous subsidies.

Industry Commissioner Martin Bangemann has sharpened the focus on the sector with a high-level group, partly made up of representatives of Europe’s car and components manufacturers, to suggest ways of solving some of the industry’s woes.

European car manufacturers already face disadvantages compared with their US and Japanese rivals by having a more fragmented mass-production market.

Six European manufacturers produce vehicles across the range, chasing a similar-sized market to that in the US, where there are only three big producers, says the study. Many, such as Italy’s Fiat, are national champions whose local dominance is only slowly being eroded by the EU’s single market.

More controversially in the wake ofthe Vilvoorde case, the study underlines a structural problem with Europe’s car industry, where high redundancy costs and social obligations make plant closures very difficult.

“American carmakers closed over 30 assembly and component plants over the last 15 years,” it says, adding that in Europe, “state aid programmes and capital injections by governments for state-owned companies prevented market forces from squeezing out excess capacity”.

This has already resulted in overcapacity, with European plants and Japanese transplants capable of manufacturing 18.1 million cars and car-derived vans in 1995, although only 12.9 million rolled off the lines. This added up to a production/capacity ratio of 71.2 % which, according to the study, is not likely to improve significantly in the run-up to the year 2000. By comparison, US manufacturers had a production ratio of 92%.

“Even without investments in new capacity, the expected growth in domestic demand and the expected development of import/export ratios are not sufficient to absorb existing excess capacity,” says the report.

In fact, the EU surplus of car exports over imports of around 800,000 units in 1994 is expected to shrink over the next few years.

Even worse, Union manufacturers are likely to feel increasing pressure on their profit margins with even sharper competition from Japanese producers and the latest kids on the block, the Koreans.

The Japanese industry is expected to bounce back leaner and fitter from its recent relative export slump caused by the giddy heights reached by the Japanese yen.

Resulting cost-cutting measures mean it can be competitive at high exchange rates of 100 yen to the dollar. The Japanese industry is expected to take 11.7% of the European car market in the year 2000, up from 10.8% in 1996.

Meanwhile, Korean exports to the EU are likely to more than double from around 179,000 in 1995 over the following five years. Part of Daewoo’s admitted strategy is to use new car plants in Poland as “an aircraft carrier from where to attack the west European markets”, says the report.

“As market pressures increase on a stagnating market with increased competition from Asian carmakers, prices will likely come down even more. Lower prices have a negative effect on break-even points and therefore enhance the problems of excess capacity,” it adds.

Eastern Europe offers no easy solution for western producers, as had earlier been hoped, with projected production in these countries expected to exceed demand.

The report also concludes that Turkey’s free trade agreement with the EU will help encourage companies to set up local plants, but will not offer real opportunities for increased exports.